The search for truth in human action

Why Stimulus Spending Depresses the Economy

There is a good reason why Bush’s “economic stimulus” plans helped land us in economic depression, and why Obama following that precedent with bigger, badder stimulus plans will do even more harm.

It is the same reason why Japan’s “stimulus plans”, upon which ours were partially based, kept them in an economic depression for a decade, and did the same thing in Sweden.

Here’s How

Lost Money: Every penny spent is taken from the private sector: whether through taxes; or by borrowing that robs from private investment, so nothing is gained. Then that money is wasted before it’s spent, because of the cost of bureaucracy, red tape, political motivation, and the lack of any control over the benefit of what it’s spent on.

Crowding Out: The government spending competes with private spending, but has no checks or balances, no responsibility, so that it can crush the private competition out of the market, causing more economic harm instead of helping. It hires away workers and managers with large budgets, yet contributes less. It draws away research and investment from the private sector, et cetera.

Chilling Effect: Healthy private investment and behavior is seen as punished, as unconditional public spending displaces it. Government spending tends to reward failure, and not to create wealth, while private spending depends upon productivity and success to expand. Bad companies, which do not contribute enough to society to justify their existence, have their ineffective ways perpetuated, instead of being excised and replaced with new competition.

Lost Money

Your Neighbors

Your neighbors are planning to upgrade all of their crappy single-pane, wooden windows to nice thermal-pane replacement windows.

(Don’t ask how I know, just work with me, here…)

Your neighbors, therefore, shall cause the full employment of a team of six carpenters/installers, for one week. And those workers will, in turn, use their pay in ways that end up rewarding others, by spending or investing.

Of course they’ll also be profiting the company that sells windows, which in turn will reward its suppliers by ordering more, et cetera.

Your neighbors will, too, have nicer windows. Their house will be more comfortable. They will save money on their energy bills. And, if they are Global Warming True Believers, they will also feel very good about their effort to save the earth.

All of this benefits society and the economy. Even the feel-good parts.

Big Brother

But perhaps your neighbors will be prevented from doing this, by Big Brotherment.

Maybe their taxes are, or will be, high enough that they won’t be able to afford to buy those thermal replacement windows.

Perhaps, in fact, the amount necessary to upgrade their house will, in fact, be spent on a Stimulus Package, funded by their taxes.

That tax money, instead of being spent on their house, will instead filter through the government bureaucracy. The majority of it will actually be paid to bureaucrats, who produce nothing but paperwork and rules.

What’s left, in theory, will go to some union contractors in Iowa, to finance a Corn Museum. Never mind that Corn makes more money for its producers than any other crop, the government is financing this to “stimulate” the economy.

So a team of three union carpenters will get paid for about five days, based on your neighbor’s tax money. Three, because a majority of the money was lost to red tape, and only five days, because the union monopoly dominating the government contract in question is overpaid.

Better still, once their hourly coffee breaks and four mandatory half-hour breaks are deducted, and you take into consideration the bizarre “safety” rules in their contract, that leave them standing around more often than working, what you will actually get is about the amount of work one carpenter’s could do in five days.

And it will be dedicated to building the 23rd corn museum in the United States.

So the options are:

Free Market

Your neighbors get a house full of thermal windows.

Six carpenters get fully employed for a week.

A window company is rewarded for improving the lives of your neighbors.

Money is saved on energy.

The planet is no longer doomed.

Government Stimulus

Iowa gets 0.01% of a corn museum.

Three carpenters get employed for five days, to do the work of one carpenter.

People may, if the project is ever finished using other people’s tax money, get to save an hour over driving to the privately funded corn museum next door in Illinois.

Now a government bureaucrat will, in defense of his precious Pork budget, say “but we can’t be sure your neighbor will buy thermal replacement windows!”

But, quite frankly, we can be just about 100% certain that they will spend it on something they value. I’m not entirely clear on how even pet rocks and full body massages would be any less of a contribution to the economy than another corn museum.

And, seriously, much of the government’s spending benefits society less than corn museums, too.

Bridges to nowhere, two thousand dollar toilet seats, military equipment the generals said they didn’t want, but some senator insisted on funding because it is built in his state, methadone for junkies that is more addictive and toxic than the heroin it is replacing, free benefits for illegal aliens…

Face it, the corn museum was actually an optimistic example of government benefiting society.

Ultimately, each dollar the government spends must come from a dollar ALREADY taken from your pocket, directly or indirectly. There is no stimulation, because it’s just the same dollar. And, worse, YOU would have bought something you felt was beneficial, not wasted it on some bureaucratic make-work project.

Crowding Out

(caption: Buying stuff on closeout from a bankrupt company helps the economy far more than a government check, regardless of whether it saves the bankrupt company)

And let’s not forget that the government’s spending competes with private spending. There is a pressure against private industry, when it’s forced to compete with a government that can forcibly finance a project without any standards for success.

Workers

As noted above, if you are a carpenter, you can get a job where you are paid for what you accomplish, in the private sector, or you can get a job in a government contract where a union monopoly guarantees you more pay, for less work, a coffee break every single hour, and you’re not actually expected to even succeed, or do good work.

With government spending, therefore, one ends up with fewer skilled workers in the private sector.

Research

Better an easy government research job with no results required except regular publication of results, than private sector research, that must actually prove some contribution to society.

This is why things like cancer research and alternative energy research have produced only insanely expensive, ineffective results.

Business

Why build a privately financed corn museum, when there is a public one planned nearby? The free market depends on the pressure of demands, which can be supplied because of the reward of profit, fame, et cetera. All of which is quashed by public competition…producing LESS economic activity, prolonging, or even creating, economic downturn.

Investment

This is even true of investment. Why risk money buying stocks, or investing in any other resource that actually helps create wealth and grow the economy, if the government is issuing trillions in bonds that it can guarantee, at gunpoint, it will be able to afford to pay off?

This is part of why the US stock market is below where it was a dozen years ago; the past nine years of massive growth in government spending have crowded out even investment, depressing economic growth and the availability of money for business and individual use.

Chilling Effect

Capitalism helps society prosper, in part, by requiring that businesses be efficient and useful, or else be displaced by other, better, more efficient competition. Government “stimulus” spending helps bad behaviors and inefficient companies survive, preventing the openings for new, better ways.

Reward Failure

Government spending, too, has to reward failure and punish success, directly. Not just by bailing out failures, but with its own agencies: It would be irresponsible to expand the budget of a project that was already coming in ahead of schedule and under budget. What a waste of taxpayer dollars! Instead, if the agency wants to expand its budget, it must fail. It must show how it is over budget and behind schedule, and how natural this is, how more money and power will help it achieve its goals.

Punish Success

Meanwhile, responsible, productive businesses are punished for their contribution to society.

What if Ford ends up the weakest of the three automakers, because it didn’t take the thirty billion taxpayer dollars and declare bankruptcy? What does this tell companies in other industries, when they’re considering whether to be productive, or else squander money and go crying to the stimulus committees for bailouts?

Government Gangrene

There are hundreds of billion dollars in bad investments, loans, et cetera, that need to simply fail, because they cannot ever be productive. Right now they are gangrene on society’s body, just burdening our health and slowly spreading…but the stimulus/bailout money keeps them from being removed, and even helps them expand, quashing healthy alternatives.

The Solution

In each case, around the world in history, the only way to get out of economic depression was for the government to STOP killing the economy with its fake “stimulus” packages.

Examples

It took Japan and Sweden ten years to figure this out. Some other countries never have, and still are suffering for it.

Even in the US, the government constantly expanded spending to “stimulate” from 1929 through 1938, and only truly enjoyed healthy economic growth when spending and regulation were massively cut in the late forties and fifties.

The opposite of this was the depression of 1920-21, where banks failed, commodity prices plummeted (like housing prices now), the stock market crashed…and the US government did virtually nothing.

That lack of “stimulus” resulted in a depression less than two years long, unlike the decade of the other examples.

Ultimately, government spending actually sucks the life out of the economy, increasing and prolonging economic depression, because it must take private money in order to “spend” the public money…as if you gave yourself a blood transfusion by taking blood your left arm and putting it in your right…with the stress of the transfusion actually leaving you weaker than when you started.

Let’s not lead people to believe that was all a waste with one bad example: The Forest Health Works Project was a partnership between the Rhode Island Department of Environmental Management and RINHS. It was funded with $673,000 in federal stimulus funds received through the U.S. Forest Service through a competitive proposal process. From fall 2009 through December 2011, this project mapped 60,000 acres, eradicated invasives on 161 acres, trained and employed workers in 27 local businesses, directly hired half a dozen full and part-time managers and field crew, and reached 2,300 members of the public through outreach programs. http://rinhs.org/who-we-are-what-we-do/programs-projects/fhwp/

None of that changes the fact that the money spent on the forest service would otherwise have, in the private economy, gone to create wealth in a way the forest service cannot. You say it employs workers in 27 local businesses, but if it were not taxed, or did not rob private investment through deficit spending, then it would employ MORE than 27 workers in private industry, and they’d be doing jobs that people voluntarily pay for, which ensures that they’re productive and helpful.

[…] A “stimulus” job is a burden on the economy that must eventually end, leaving the worker unemployed again…but a job at at a real company pays for itself…as long as the worker makes the employer a profit, the business keeps employing him. […]

[…] started as a fight against Democratic talk of raising taxes, fighting bailouts and “stimulus” spending, but got their greatest momentum fighting the socialized health care bill, which Ron Paul had […]

a well put article. too bad there are so many people in (pick a country) who think that it is necessary to setup such projects in the first place. imagine the screaming if governments did nothing???
anyhow this is one of the very few websites outside of mises.org that actually posts the depression of 1920-21 that i have seen.
kudos to ya!!!

[…] same amount of economic activity, but crammed hastily into a shorter period of time, and with the economy-damaging side-effect of government spending having required government debt or taxpayer […]

This is more of a hit piece for the Corporate empire then about actual facts..
We have seen the actions of these Global Empires at work and all they have done is to over price their products and making large profits then actually given your money worth..
Take a look at Exxon , Halliburton , Blackwater and all the other corporations which have taken American plants and jobs overseas for their tax rip off , their cutting of American jobs , benefits , wages so they can make a few pennies more..
What this really gives them also is the breaking of the unions and wealth of Americans to fight against this BS>.
We have even given these Global Giants our tax money so they can outsource more jobs overseas..

While I agree with most of your article, I take exception to your description of union workers. While I have no doubt that there are some unions out there like that, the majority are filled with hard working men and women. My husband attended four years of schooling and is meticulous in his work. To say that he’s not a skilled worker is an insult. His wages reflect the quality of his work and provide for a decent living for our family. His union provides for one 30 minute lunch a day and two 10 minute breaks – less time then I received working in the private sector when I was working. You can take exception with corrupt unions that embezzle pensions and waste money, but please realize there are hard working men and women in those unions who are just trying to make a decent wage to support their familes.

Whether his wages reflect a decent living is irrelevant, and should be. The question is whether, outside of a monopoly situation, he and his employer would have agreed upon that scale of pay.

Unions are very bad for everyone…employer, worker, and consumer. They strip away the worker’s right to negotiate his pay, reducing productivity and raising costs.

To say WHETHER your husband is a skilled worker would be a leap, because the union probably strips away the relationship between performance and pay. Typically, pay becomes based on how long you’ve worked, instead of how well you work.

The union should not “provide” breaks at all. That should be between the worker and employer. That very wording illustrates the problem with a union monopoly.

I’ve thought the stimulus plans were necessary policy. However, a friend sent me the link to this your article, and it’s causing me to consider whether the stimulus bills might do more harm than good. I’m genuinely concerned; I don’t want to support a policy that just seems to be good but which actually will not work. On the other hand, I wouldn’t want to oppose the stimulus bills (and already politicians and others are calling for more) if they are good medicine, so to speak.

In the so-called “blogosphere” of American politics, anything short of enthusiastic agreement is often seen as opposition, the enemy, even traitorous. This is the only post of yours I’ve ever read, so I don’t know know your temperament in that regard. But I hope you’re open to engaging me on some honest questions I have about your post here.

In your first bullet point about the lost money, you seem to imply that a lot of government spending (all of it funded by taxes of course) is harmful ipso facto, precisely because it takes money out of the private sector. (I may be reading too much into a simple bullet point.) But surely some government spending, and even quite a lot of it, given the costs of roads, military, etc., is actually necessary and good for the economy?

I wonder how much or what kind of government spending is good. For example, highways, education, military, law enforcement, bridges, other infrastructure.

To take just one example, highways. Taxing, and even borrowing, to spend on necessary highways and bridges would seem to be an example of smart tax and spend. Granted, it takes money from the private sector. But the private sector could never build even a county highway system, let alone state and federal highway systems. It’s a good investment, it would seem, since it helps the entire economy to run efficiently. Businesses of all kinds can get their goods to market. (Of course we exclude from this calculation any truly useless bridge to nowhere!).

Leaving aside all the little stuff, the easy targets (expensive Pentagon toilet seats, corn museums, etc.) … How much government spending, and what kinds, are good and necessary, even if we have to borrow against future revenue made possible by the investment (much like any private company borrows money in order to grow the business)?

And by the way, it would seem actually more efficient and less expensive, if it’s planned right, for a young country without highways to BORROW money, not to SAVE it up, in order to build a highway system, for precisely the same reason that companies borrow, not save, in order to expand quickly. For example ….

If, say, a hot dog vendor had to save up a large sum of money to build a hot dog restaurant (rather than borrow it from the bank using good credit and a good business plan), he would wait for decades, perhaps. And the whole time he wouldn’t make much money. But if he borrows money for the restaurant all at once, and builds his restaurant, he might pay off the loan within five years or less. Even if it took him decades, his standard of living would be much higher — the loan payment would be just one of his bills. Meanwhile he would have a much higher income via the restaurant than he would have had via the hot dog stand. Does the same dynamic apply to smart government spending?

I think the same dynamics would apply to a young country that needed a highway system. They should borrow the money to build the highways, get it done, so that businesses could use the highways, pay taxes on them, pay off the public debt thereby, and everyone’s standard of living would be higher.

However, I’m not an economist or even an accountant. I just want to be an informed citizen so that, come voting time, I’ll be better able to make a decision that will help, not hurt, us all.

> On the other hand, I wouldn’t want to oppose the stimulus
> bills (and already politicians and others are calling for more)
> if they are good medicine, so to speak.

I am not aware of a single example of a “stimulus” spending package ever having helped a country’s economy, in history.

You’d think that some economies would coincidentally recover right after a stimulus package, creating at least the illusion of one working…but I’m not aware of any.

This implies, to me, what so many economists already say: That the stimulus packages actually PREVENT recovery.

> In the so-called “blogosphere” of American politics, anything short of enthusiastic
> agreement is often seen as opposition, the enemy, even traitorous. This is the only
> post of yours I’ve ever read, so I don’t know know your temperament in that regard.
> But I hope you’re open to engaging me on some honest questions I have about your post here.

As far as I’m concerned, honest debate is a benefit to me, I consider it a favor on the part of anyone who engages in it.

> But surely some government spending, and even quite a lot of it, given the costs
> of roads, military, etc., is actually necessary and good for the economy?

Whether the private people could build roads and defend themselves just fine is a separate debate, so let’s assume for the sake of argument that the government needs to do those specific things.

Despite this, government cannot do them efficiently, nor profitably. Its organization and coercive funding of such projects is, at best, a necessary evil.

There have been calculations done on the gigantic costs of the Interstate Highway System that say its great benefits are actually outweighed by the lost opportunity represented by the mind-blowing volume of tax money consumed.

And, worse, that precedent led to the insane squandering of what, in modern money, is TRILLIONS of dollars on the moon shot, which definitely didn’t provide us with infrastructure, nor much of anything else.

> I wonder how much or what kind of government spending is good. For example,
> highways, education, military, law enforcement, bridges, other infrastructure.

Again I note that almost none of the trillion-plus in planned “stimulus” spending is on ostensibly necessary things like roads and infrastructure.

I won’t stipulate even for the sake of argument that increased spending on education is good, since the record of public education in the US is that the more we spend, the worse the results get, and there is a good economic reason for this to happen.

But now I’ll actually address your question properly:

We were already spending at least enough, on roads and military…probably too much. In fact, the interstate highway trust fund has almost always had a massive surplus…the huge energy tax that funds it is far greater than is necessary to maintain the highways. In fact, Congress has always robbed that “trust” fund for general spending, instead of saving it for future needs, or expanding the spending to match highway needs.

And, of course, our military is so over-funded that the military…a government bureaucracy bred to justify spending as much money as possible…is actually having to fight to cut things we don’t need, the F22 fighter being the famous example.

The whole POINT of a “stimulus package” is that it’s spending above and beyond what was supposedly necessary.

So it is only gratuitous, makework spending, really. It’s barely better than “I’ll pay you to dig holes, and your neighbor to fill them in, and then you to dig them again, infinitely, and that way you both will have job security”.

> Granted, it takes money from the private sector. But the private sector
> could never build even a county highway system, let alone state and
> federal highway systems.
> It’s a good investment, it would seem, since it helps the entire economy
> to run efficiently. Businesses of all kinds can get their goods to market.

I can’t resist asking…do you think that if the government did not build roads, suburb developers and Wal Mart would just helplessly build their structures out in fields and wonder why nobody came? Personally, I think that MORE roads, and better ones, would be built at less cost, because that’s what’s necessary to sell houses and discount goods.

> And by the way, it would seem actually more efficient and less expensive,
> if it’s planned right, for a young country without highways to BORROW
> money, not to SAVE it up, in order to build a highway system, for precisely
> the same reason that companies borrow, not save, in order to expand quickly.

We may need to take a detour here to talk about whether that is unjust.

It was more efficient and less expensive for Parliament to levy taxes on people who could not vote them out of Parliament, in 1773.

But not only was it a really stupid thing to do, losing them the Colonies, but it was also an injustice, because it was taxation without representation.

When a government borrows money, for example with bond issues or treasury notes, it is levying a tax on a future generation, who has no power to vote against it when it’s happening. This is, quite literally, taxation without representation.

> If, say, a hot dog vendor had to save up a large sum of money to build
> a hot dog restaurant (rather than borrow it from the bank using good
> credit and a good business plan), he would wait for decades, perhaps.
> And the whole time he wouldn’t make much money. But if he borrows
> money for the restaurant all at once, and builds his restaurant, he might
> pay off the loan within five years or less. Even if it took him decades, his
> standard of living would be much higher — the loan payment would be
> just one of his bills. Meanwhile he would have a much higher income via
> the restaurant than he would have had via the hot dog stand. Does the
> same dynamic apply to smart government spending?

It certainly could, if there is such thing as smart government spending.

Let’s assume there is, once in a great while at least.

One huge difference is that the business loan is voluntary, and only against the guy who is going to spend the loan.

I’m all for the Federal government’s members taking out business loans to fund Federal spending. There are, if you count government contractors, MILLIONS of Federal employees…let ‘em borrow the money, consensually.

But what percentage of this trillion-plus dollars in planned “stimulus” is “smart” spending? Surely we all agree the government already squandered a large portion of its spending unwisely, even before that. It didn’t NEED more, in order to produce the things we need.

If a subset of the makework spending in the stimulus is “smart”, then it could have been accomplished by cutting the dumb spending that was already going on.

If, as is probably reasonable, your reply is “well, only set percentage of government spending will ever be smart, so we need to spend additionally to get more smartness”, then this actually implies that government spending MUST be depressing, because you’ll always have the larger dumb spending burdening each additional dollar of smart spending.

And, anyway, we’re not a young country. Which means that even if the reasoning is entirely correct, it wouldn’t apply to this massive over-the-budget stimulus package.

About

This site has its origins before the word “Blog” existed. Back then its owner, Kaz, was simply thought of as having a website that published socio-political articles with regularity…But the only real difference was that the RSS/XML protocals were not yet used this way.

The website was known as Site of the Sentient, a reference to the famous Words of the Sentient, that Kaz had been editing for years previously.